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Financial Statement Analysis, Flexible Budget

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R.J. Falk is the chief executive officer of Ventura Electronics. Falk is an expert engineer but a Novice in accounting. Falk asks you, as an accounting major, to explain a) the bases for comparison in analyzing Ventura financial statements and (b) the limitations, if any, in financial statement analysis.
Write a memo to R.J. Falk that explains the basis for comparison and the factors affecting quality of earnings. Include a 350-700-word memo addressing the problem

Preparing a Flexible Budget
The flexible budget at the 70,000-unit and the 80,000-unit levels of activity is shown below.
70,000 Units 80,000 Units 90,000 Units
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,400,000 $1,600,000 $
Cost of goods sold . . . . . . . . . . . . . . . . . . . . 840,000 960,000
Gross profit on sales . . . . . . . . . . . . . . . . . . . $ 560,000 $ 640,000 $
Operating expenses ($90,000 fixed) . . . . . . . 370,000 410,000
Operating income . . . . . . . . . . . . . . . . . . . . . $ 190,000 $ 230,000 $
Income taxes (30% of operating income) . . . 57,000 69,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 133,000 $ 161,000 $
Complete the flexible budget at the 90,000-unit level of activity. Assume that the cost of goods sold and variable operating expenses vary directly with sales and that income taxes remain at 30 percent of operating income.

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R.J. Falk is the chief executive officer of Ventura Electronics. Falk is an expert engineer but a Novice in accounting. Falk asks you, as an accounting major, to explain a) the bases for comparison in analyzing Ventura financial statements and (b) the limitations, if any, in financial statement analysis.
Write a memo to R.J. Falk that explains the basis for comparison and the factors affecting quality of earnings. Include a 350-700-word memo addressing the problem

There are two principal purposes in analyzing financial statements: 1) assess past performance and current financial position & 2) assess future returns and related risk. Financial statements do a good job of assessing past performance but are less informative about the prospects for the future.
The tools and techniques that are used to analyze financial statements include:
? Horizontal analysis including trend percentages
? Vertical analysis including common size statements
? Industry comparisons and benchmarking
? Ratio Analysis

Horizontal analysis is the study of dollar and percentage changes in financial statements from the previous year to the current year. Trend percentages are a form of horizontal analysis that looks at trends over a number of years. They are computed by selecting a base year whose amounts are set equal to 100%. The amounts of each following year are expressed as a ...

Solution Summary

Two questions are answered:
1) Financial Statement Analysis-bases and limitations- is discussed.
2) F lexible Budget is prepared

$2.19